Last year, the number of baby boomers who entered retirement grew at the fastest annual clip on record, according to a Pew Research Center analysis, more than doubling from the prior year’s rate of 1.5 million to a whopping 3.2 million new retirees.

Every year, more people retire than in the previous year, but the Covid pandemic upped the pace. If you couldn’t work anyway and you were near retirement, why not take the plunge?

The Income Gap
But retiring early has consequences. Unless a client has a terrific pension plan or a fortune in savings, they’ll probably have to depend on Social Security as a replacement for employment income. Yet the youngest age at which you can draw Social Security is 62, and if you can put it off till age 70—at which point you must start taking checks—you’ll maximize the monthly benefit. (The longer you delay Social Security, the larger your check will be.)

Either way, if you stop working before you start receiving Social Security, you could find yourself without a steady income for several years. So what are the options?

Consider Annuities
To fill the income gap between early retirement and the beginning of Social Security payouts, some financial advisors recommend annuities. “The annuity can provide a safe and predictable income stream,” says Ben Barzideh, wealth advisor at Piershale Financial Group in Barrington, Ill. “It feels like a paycheck, just like when you were working. It’s not going to go down or go away.”

But Barzideh doesn’t recommend this solution for all clients. Sometimes he prefers a “tactically managed investment model” that shifts exposure levels based on relative risk, he says. Still, annuities can work for someone who doesn’t want exposure to stock and bond market fluctuations, he adds.

Many investors, though, prefer to manage their own finances rather than “surrender their assets to an insurance carrier in exchange for a guarantee,” says Philip Chao, chief investment officer and principal at Experiential Wealth in Cabin John, Md.

Personal Preferences
It’s a question of personal taste and temperament. “Do you want to self-insure or offload the risk to an insurance company?” says Chao. “Bottom line, it is about preference rather than utility function.”

Not every retiree is disciplined enough, he says, to handle their own portfolio and take regular withdrawals. Mismanagement could end up being “much more costly than surrendering the needed amount to a carrier.”

David Blanchett, head of retirement research at Morningstar Investment Management in Chicago, might agree. “Pulling money from savings isn’t easy,” he notes.

It takes discipline, and people have to be careful not to deplete savings they may need in the future. An annuity, on the other hand, can simplify the process of drawing income, he says, and may provide a more attractive payout than what you could get from fixed-income securities these days.

“Annuities truly are an effective tool to provide complete certainty that a client can cover a set amount of basic living expenses while waiting for Social Security to begin,” says Eric Henderson, president of Nationwide Annuity in Columbus, Ohio.

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